Fast Retailing Ltd., the Tokyo-based owner of fast-fashion chain Uniqlo and an investor in contemporary brand Theory, on Thursday surprised the industry with an unsolicited $896 million offer for Barneys, trumping the $825 million bid from Dubai-based investment firm Istithmar that seemed relatively assured.

The approach immediately set off speculation as to what will happen next — and even whether more bidders could enter the race. The Middle Eastern fund did not respond with a higher offer, insisting in a statement that it was sticking with its earlier bid. Jones Apparel Group Inc., Barneys’ parent, declined to comment beyond a statement acknowledging Fast Retailing’s offer. Peter J. Solomon, the investment banker advising Istithmar, also declined comment.

The speculation was only fueled when Fast Retailing, in its statement, said it had approached Jones last fall about buying Barneys. That was only a few months after Jones gave up its attempt to sell itself as a whole when no adequate offers came forward. WWD first reported in April that Jones was in talks with private equity investors about selling Barneys separately.

“Fast [Retailing] is a very aggressive company, with an incredible business in Japan,” said Marvin Traub, of Marvin Traub Associates, who has done a lot of work in the Middle East. “The stock grew and became a commodity to acquire things. It is in a totally different business from Barneys, so this would be diversifying. I would be very surprised if Istithmar didn’t respond. Istithmar has some background in luxury goods and real estate. But both companies are coming at Barneys in different ways.”

While Fast Retailing is primarily known for its Uniqlo chain, industry sources said the Barneys bid fits in with its three-year business plan that includes between $2.7 billion to $3.6 billion for investments to help it expand both overseas and in Asia, with a combined company sales goal of $8.8 billion by 2010.

Fast Retailing said in a statement that it is “pleased that Jones’ board of directors has concluded that [Fast Retailing]’s proposal is reasonably likely to lead to a superior offer for Barneys.”

The group said it believes Barneys “has attractive long-term growth potential through its leadership position in the luxury segment in the U.S., as well as in the affordable luxury segment through Barneys Co-op. Fast Retailing sees potential top-line synergies in having Barneys as a member of its global retailing group.”

Fast Retailing has been keen on the U.S. retail space for the past year. Last fall, investment bankers noted the company’s interest in acquiring a U.S. retailer, although the target couldn’t be ascertained. There was speculation it might have looked at one of the divisions of Gap Inc., since Uniqlo has been operated as a Japanese version of casual apparel.

The firm even attempted to purchase casual apparel competitor, Hong Kong-based Giordano International Ltd., last fall. Negotiations fell apart and an agreement was never reached. Similar to Zara and Hennes & Mauritz, Fast Retailing is known for its ability to get products quickly from the design team to production and then into its shops.

Fast Retailing was founded in 1963 by chief executive officer Tadashi Yanai, who revolutionized Japanese fashion retailing with his Uniqlo chain that made low-cost, colorful basics chic in a market known more for its taste for luxury. While Uniqlo has had its ups and downs in Japan in recent years, the parent company has been eager to expand the concept in Europe and the U.S., where it opened a store in Union Square here last November and revealed plans to follow with units in Paris, Milan and even Shanghai.

Fast Retailing currently operates 1,800 specialty stores in over 12 countries. For the year ended August 2006, Fast Retailing had consolidated overall net sales of $3.7 billion and a consolidated operating profit of $586 million. Among the best known global brands within the Fast Retailing Group are Uniqlo, Theory, Comptoir des Cotonniers and Princesse tam.tam. Uniqlo is Japan’s largest apparel retail chain with approximately 750 stores throughout Japan, as well as stores in the U.S., the United Kingdom, South Korea and China, including Hong Kong.

“In my personal experience working with Fast Retailing for the past three years, I have acquired great respect for their vision as global retailers,” said Andrew Rosen, president and founder of Theory. “They have been an ideal partner for us at Theory by supporting our platform to expand our business globally, while respecting the heritage of the brand and culture of our company.”

The Japanese company’s entrance into the race to buy Barneys was enabled by a “fiduciary out” clause in Jones’ agreement with Istithmar that allows the U.S. group to consider any rival offer received before July 22. All due diligence and negotiations with such a third party would have to be completed by Aug. 11. In that event, Jones would have to pay a termination fee of $20.6 million to Istithmar. If Jones ends the deal with Istithmar after July 22, the breakup fee rises to $22.7 million.

But the latest nonbinding proposal, although a higher offer than the Istithmar agreement, is by no means a done deal. Fast Retailing still has to do its due diligence, as well as negotiate a binding agreement with Jones. The agreement with Istithmar has not been terminated and remains in effect.

Neither the Istithmar deal nor the Fast Retailing proposal includes the Japanese license for Barneys Japan, which is owned by Sumitomo Corp. and Tokyo Marine Capital.

A financial source familiar with the terms of the Jones-Istithmar deal called the “fiduciary out” clause “clever,” noting that by going the route of a private equity house, the apparel giant was able to secure both a floor for the purchase price and still get another bidder to come in at a higher proposal that was enough to both top the initial bid and cover the $20.6 million breakup fee.

“This is wonderful for shareholders of Jones. The company gets extra money for doing almost nothing,” the source said.

If a deal is reached with Fast Retailing, the source said the new agreement would likely have its own breakup fee, and perhaps would include some limitations on unsolicited proposals to just bids for the entire company, which would also include Barneys New York. Unsolicited bids for the entire company were also contemplated in the Jones-Istithmar transaction.

Istithmar said in a statement: “We believe that our definitive agreement to acquire Barneys New York for $825 million reflects a full and fair valuation for the company. We remain committed to closing this transaction and continue to be enthusiastic about working in partnership with the strong management team of Barneys to grow this unique asset further and create an even brighter future for the company.”

No one doubts that Jones is making a healthy return on its Barneys investment. The apparel and footwear group acquired Barneys in 2004 for $397.5 million and will net approximately $290 million from the sale of the chain. Due to some tax benefits, Peter Boneparth, president and ceo of Jones, said the group will have net cash proceeds after taxes and transaction expenses of approximately $770 million.

But there’s not much known about Fast Retailing’s plans for the luxury chain, a fact that troubles some industry veterans.

“In my judgment, Barneys doesn’t fit the more basic promotion-oriented Uniqlo,” said Walter Loeb, a former Wall Street retail analyst and now consultant.

From a strategic vantage point, Loeb prefers the deal struck with Istithmar. “The Dubai firm said it will leave Barneys alone, and let current management run the business and grow the retail chain organically. It makes more sense to me, especially that Barneys is now just blossoming. What will Fast Retailing do? Will it buy back Barneys Japan at some point? Fast Retailing could do a lot of things, but my impression is that the private label orientation of Uniqlo is not in sync with the operation of Barneys,” he said. — With contributions from Koji Hirano, Japan, Miles Socha, Paris and David Moin, New York